Place-based preferential tax policy and industrial development: Evidence from India’s program on industrially backward districts

• Published in: Journal of development economics 2021-05, Vol.150, p.102621, Article 102621
• Main Authors: Hasan, Rana, Jiang, Yi, Rafols, Radine Michelle
• Format: Article
• Language: English
• Subjects: Backward districts; Informality; Place-based policy; Preferential tax; Regression discontinuity; Spatial spillovers
• ISSN: 0304-3878; 1872-6089
• DOI: 10.1016/j.jdeveco.2020.102621

We evaluate a tax-exemption program initiated by the Indian government in 1994 to promote manufacturing in districts designated as industrially backward on the basis of a continuous gradation score that reflected district characteristics in early 1990s. Employing a regression discontinuity design, we find that the program led to a significant increase in firm entry and employment, especially in light manufacturing industries of the better-off backward districts in the short run. However, this was partly driven by spatial displacement of economic activity from neighboring districts that narrowly missed qualifying for the program. ​Further, we do not find the effects of the program to persist after it ended. •The backward district program led to a 60% increase in number of firms and employment in light manufacturing industries of the better-off backward districts over four years since it was introduced.•The effects represented gains in real economic activity in the treated areas as no significant effect on firm formalization was detected.•The program have generated negative spatial spillovers to the non-backward districts geographically and economically close to the better-off backward districts.•The program’s effects did not persist six years after the program cut its tax benefits by three fourths and one year after the program ended.